Shrinking Lines of Credit

WHEN economists say that consumers used their homes as A.T.M.’s during the recent credit boom, they are often talking about home equity lines of credit — a form of second mortgage popular among homeowners looking for a cushion against future cash shortfalls or a way to finance a new kitchen or a vacation.

It is no secret that lines of credit are harder to find these days. But what many homeowners may not realize is that their existing lines of credit can be eliminated at the lender’s whim.

Washington Mutual, one of the nation’s biggest issuers of second mortgages, said in May that it had reduced or suspended about $6 billion of available credit under existing home equity lines. Countrywide, Bank of America and JPMorgan Chase have made similar moves.

Analysts say the cuts have mostly come in regions where real estate values have dropped, but people with poor payment histories can also be affected.

“We will increase, decrease or suspend lines based on a number of factors, including a customer’s entire relationship with WaMu, their payment status and history, changes to their creditworthiness, and changes in the value of their property,” said Sara Gaugl, a Washington Mutual spokeswoman. “We believe this is part of being a responsible lender.”

Home values are a particularly large component of the lender’s decision, Ms. Gaugl said, and since the real estate market remains moribund, more credit lines could be cut. “We will continue to evaluate individual home equity lines of credit in relationship to the amount of equity a customer has in their home,” she said, “and if appropriate, we’ll lower the line amount.”

Like other lenders, Washington Mutual does not publicize its guidelines for making cuts, since they vary, based on the borrower’s financial profile and changes in a home’s value.

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Ms. Gaugl said, however, that Washington Mutual customers could appeal the company’s decision. Washington Mutual, which as of March 31 still had $51 billion of undrawn credit line commitments, continues to offer credit lines to qualified borrowers.

According to Cameron Findlay, chief economist at LendingTree, an online mortgage referral and origination service, borrowers with credit lines need not be blindsided by the bank. “If you’re wondering if you could be next,” he said, “just contact your lender and ask them what your loan-to-value ratio is for that loan.”

Traditionally, lenders would offer borrowers credit as long as they had more than 20 percent equity in their homes. That threshold dropped during the credit boom, when real estate values were climbing quickly. Now traditional lending standards are once again in vogue, and equity is the touchstone.

Lenders have automated systems that can estimate a home’s value without a formal appraisal, Mr. Findlay said, but they are now most likely underestimating that value “because they’re hedging their bets a little bit.”

Borrowers who have had their credit lines eliminated can still find “pockets of available credit” elsewhere, Mr. Findlay added. But such loans are increasingly difficult to find.

Those who cannot qualify for a new credit line not only lose an important means of financial flexibility, but also face an additional insult: a declining credit score. If the borrower has already taken out, say, $10,000 on an existing $25,000 credit line, and then the limit is reduced to $10,000, credit rating agencies will penalize the borrower for maxing out the available credit. “It’s a double whammy,” Mr. Findlay said.